World Economy

Is it time for Dr. Copper to be struck off?


The slide in copper prices to a six-year low has fueled fears of a stagnating global economy. However, the industrial metal's track record in diagnosing the health of the world economy has been shaky for years — and other, "better" indicators are largely reassuring, according to economists.

"Despite copper's widespread use in industry and construction, we would be wary of reading too much into the recent price weakness," Julian Jessop, chief global economist at Capital Economics, said in a report.

Copper production in Johor, Malaysia
Munshi Ahmed | Bloomberg | Getty Images

Three-month 24-hour copper prices traded roughly flat on Thursday at $4,615 per ton. The red metal has slid steadily since the start of 2011 — bar a small rebound at the end of that year — and hasn't reached these depths since the fallout from the global financial crisis.

Copper's widespread use across different industries means it is often viewed as an indicator of global economic health, with declining prices indicating waning demand and a forthcoming slowdown. In particular, copper prices are linked to the health of China's manufacturing sector, as the world's second-biggest economy is the dominant consumer of industrial metals.

China's Caixin General Manufacturing Purchasing Managers' Index (PMI) read 48.3 in October, indicating a continued contraction in industrial activity.

Jessop said, however, that copper prices were "at best, a coincident indicator of the current state of demand, rather than a reliable guide to the future."

"Even if copper prices keep falling, this could still be consistent with an improvement in China's manufacturing PMI from current levels, provided prices decline at a slower pace," he added in his report.

Copper hitting six year lows

Factors unrelated to the global economy that could drive copper prices include "fickle swings in sentiment" and industry-specific causes, said David McWilliams of Global Macro 360 Degrees.

"There could be many reasons why copper prices are falling that have nothing to do with overall economic activity, especially where growth is increasingly service-based. These could include new sources of supply, lower costs and structural shifts in demand due to substitution and new technologies," said the Dublin-based economist in a report on Thursday.

In October, the International Monetary Fund downgraded its global growth forecast for 2015 to 3.1 percent, down from the 3.3 percent rate forecast in July and from the 3.4 percent growth recorded in 2014.

However, the JP Morgan global manufacturing and services PMI showed a modest acceleration in economic growth in October. Its survey for the month read 53.4, up from 52.8 in September, indicating that the world economy was expanding at a faster rate than before.

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— By CNBC's Katy Barnato. Follow her on Twitter @KatyBarnato.